The Secret of American Health Care

Surprise! It's already socialized.

At the end of 2011, the remarkable innovator Donald Berwick was forced to resign as the recess-appointed head of Medicare and Medicaid, a casualty of Republican-led opposition to his confirmation. An outspoken fan of the United Kingdom’s single-payer system, Berwick was portrayed by critics as a socialist who once commented that “excellent health care is by definition redistributional.” In 2010, for example, Republican leaders of the Senate Finance Committee grilled him about whether he “still distrusted the free market” and made it his goal to “make health care rationing the new normal.”

The furor over Berwick reflects a broader, fundamental disagreement over the nature of health insurance. Should it be “social” insurance, with which financial risk is leveled between those who are ill and healthy, so the carefree twentysomething and diabetic elderly man pay equally into the system? Or would it be better structured as “actuarial” insurance, where those expected to consume more shell out more, just as those who drive flashy, expensive cars or rack up speeding tickets pay higher auto insurance rates? If your view is the former, you generally support the notion of a single-payer system, as Berwick and many Democrats do. On the other hand, if you see health insurance as actuarial, you favor tiered premiums depending on age and pre-existing conditions, and tend to like health savings accounts, as many Republicans do. This dispute is central to continuing political wrangling over the 2010 health reform legislation, the main provisions of which are scheduled to take effect in a few years.

But Americans made their choice clear long before Barack Obama ever signed the law—and they picked social insurance. The issue today isn’t whether we should redistribute health care dollars. We do, arguably to the same degree that every other country does. Systems with national health insurance systems explicitly redistribute money before patients get in car accidents, discover cancer, or develop heart disease. Here we do it in secret after illness occurs. We create the illusion of actuarial insurance, when the truth is that all major American health care institutions have been socialized for decades.

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Consider the following simple question: How much does it cost to stay in the hospital when someone is sick? Until 1983, the answer was simple: You, your insurer, or Medicare paid the hospital on a “per diem” basis, meaning that the hospital charged roughly the expense they incurred, plus a small administrative fee. You paid for what you got. In 1983, however, Medicare suddenly changed everything. The agency adopted the “prospective payment system,” which decoupled payments from the actual cost of care in the hospital. In other words, they suddenly paid a fixed price that had nothing to do with what happened in the hospital. In the beginning, administrators loved this since the fixed prices were so high that hospitals had an average 13-percent margin on Medicare patients. Soon enough, however, the payments had fallen behind inflation, and by 1991, hospitals faced an average margin of minus 2.4 percent. They responded rationally to this crisis by jacking up list prices for private insurers like Blue Cross or Aetna in a redistributive practice known as “cost shifting.” In 1997, the Balanced Budget Act further lowered Medicare payments, and soon private insurers were paying 20 to 30 percent higher rates than Medicare.* In effect, this practice amounts to an annual tax of about $922 per privately insured family, which defrays the cost of those on public insurance. (A strange corollary: Uninsured or “self-pay” patients get charged two- to threefold higher sticker prices than insurers pay, because no one’s negotiated lower rates for them.)

But that’s only the first form of redistribution. In many cities, certain hospitals may bear a larger share of caring for those with poorly paying insurance or very expensive and complicated conditions. The result, recently made clear in a series of Boston Globe articles and an attorney general’s report in Massachusetts, is a baffling landscape of prices. Take a brain MRI: Medicare now pays about $500 for one, wherever it’s delivered. Due to strong-arm negotiating, Massachusetts General Hospital commands $1,153 for the same service from private insurers, while the outlying Brockton Hospital only managed to wrangle $590. The same type of disparity exists for dozens of other procedures. In other words, the top flight medical care enjoyed at major academic medical centers results from massive virtual tax on smaller hospitals.

In addition to these ways to spread around money—from private to public insurers and from small hospitals to major medical centers—hospitals themselves redistribute from wealthy clinical divisions that pull in buckets of cash, such as cardiac surgery or intensive care, to poorer ones that are regularly in the red, like psychiatry or endocrinology. An artifact of the arcane manner in which Medicare rewards “procedural” care like fancy scans and surgeries over “cognitive” care like face-to-face conversation and exams using cheap stethoscopes or reflex hammers, these discrepancies force hospital administrators to steal from the rich clinicians in order to fund the poor. These cross-subsidies are so important that the federal government once banned the construction of “specialty hospitals” that siphon away profitable medical procedures, since their existence would threaten general hospitals’ solvency.

Almost nothing that politicians are currently debating is likely to change the overall costs of care. What’s merely at stake is the shell game about who appears to be paying. Want to cut Medicaid rolls to save money for your state? Private plans would see their costs escalate as hospitals shift costs. Want to defund mental health services for the poor? Major centers will likely cross-subsidize their care by more aggressively marketing other, expensive services like cardiac catheterization and weight-loss surgery to make up the gap. To be sure, some people will be hurt with the cuts, but like a complex organism, the American health care system has developed homeostatic mechanisms to ensure its nourishment and survival. It’s very hard to starve the beast.

Hiding the redistribution inherent in American health care has a corrosive effect on our national dialogue. It’s wrongly believed that our system prizes individualism and financial responsibility, when nothing could be further from the truth. Arguably, our system is just as redistributive as those of Europe, Canada, or Australia. We just do it in the dark and pretend to be exceptional.

Correction, Feb. 1, 2012: This article originally misidentified the 1997 Balanced Budget Act as a Balanced Budget Amendment. (Return to the corrected sentence.)

Darshak Sanghavi, a pediatric cardiologist, is a fellow of the Brookings Institution and Slate’s health care columnist. Follow him on Twitter.